2016 (10) TMI 846 - AT - Income Tax

Treatment to amount on account of interest on FDRs to be income from other sources - nature of income - Held that - As decided in Jaypee DSC Ventures 2011 (3) TMI 309 - Delhi High Court the bank guarantee was furnished as a condition precedent to entering into the contract and further it was to be kept alive to fulfil the obligations - interest earned by the assessee on the FDRs has intrinsic and inseggregable nexus with the work undertaken and, therefore, the interest earned by the assessee is capital in nature and shall go towards adjustment against the project expenditure and the same cannot be assessed as income from other sources - Decided in favour of the assessee

Summary

Issues:
1. Assessment of interest income under the head "Income from other sources."
2. Allowability of expenses incurred in relation to earning interest on Fixed Deposit Receipts (FDRs).
3. Treatment of interest earned during the construction period.
4. Consideration of business expenses against any other income during the year.

Analysis:

Issue 1: Assessment of interest income under the head "Income from other sources."
The appellant contested the AO's addition of interest income of ?12,15,015 from Fixed Deposit Receipts (FDRs) under the head "Income from other sources." The AO assessed the interest income as the appellant had not shown it under the correct category. The CIT(A) upheld the AO's decision. However, the appellant argued that the interest earned was linked to business activities and should reduce the cost of work-in-progress. The Tribunal referred to previous decisions and held that the interest income was business-related, following the decision of the Hon'ble Jurisdictional High Court in a similar case. Consequently, the appeal was allowed.

Issue 2: Allowability of expenses incurred in relation to earning interest on FDRs.
The appellant also raised the issue of expenses related to earning interest on FDRs. The CIT(A) did not allow these expenses. However, the Tribunal, considering the business nature of the interest income, allowed the appeal based on precedents and the nexus between the interest earned and the business activities.

Issue 3: Treatment of interest earned during the construction period.
The appellant argued that interest earned during the construction period should reduce the cost of construction and not be assessed as "Income from other sources." The Tribunal, following previous decisions and the business purpose of the interest income, allowed the appeal, emphasizing the connection between the interest earned and the business activities.

Issue 4: Consideration of business expenses against any other income during the year.
The appellant contended that all expenses incurred after setting up the business should be allowable and set off against any other income during the year. The Tribunal, in line with the business nature of the interest income and previous decisions, allowed the appeal, stating that business expenses should be considered against any income during the year.

In conclusion, the Tribunal allowed the appeal, considering the business nature of the interest income and the nexus between the interest earned and the appellant's business activities. The decision was based on precedents and the interpretation of relevant legal provisions and judgments.